For Barrick, gold mi ning means business
If you’re talking about gold mining, it’s hard to ignore Barrick Gold Corp. It has become the highest valued, lowest cost large gold miner in the world, with a better credit rating and a more general investor following than any other gold miner.
The Toronto-based corporation has repeatedly transmorphed during its 18-year history, from a small petroleum company, to a small Canadian gold miner, to an intermediate North American gold producer, and most recently to a major international mine builder.
To try to find out what has made Barrick into such a financial success, CMJ interviewed executives–including CEO Randall Oliphant, COO John Carrington, CFO Jamie Sokalsky and exploration senior vice-president Alex Davidson–in their Toronto offices during March.
Distinctive and Decisive
John Carrington has been with Barrick since February 1995, at first as executive vice-president operations, and as COO since 1996. While he is the most recent of the executives to arrive at the company, he brought extensive mine operating experience with him when he joined. He jokes that he’s the “CME” (chief mining executive); “that’s my job security.”
He describes the evolution of the Barrick management. “There was a unique relationship between Bob Smith [first president] and Peter Munk [first CEO and chairman]. Peter was the businessman. He was the guy who conceived of the idea of Barrick, and was very much involved in the deal-making side. Bob was the person who could actually make some of the stuff happen. Peter and Bob had a very close relationship and I think they both understood what they as individuals were bringing to the table. Bob wasn’t a Peter and Peter wasn’t a Bob, but together they kind of made music.
“In a similar way, Randall comes from the business side of the company. I come from the operations side of the company. Either one of us couldn’t do the whole thing, but together… one plus one equals three.” Munk remains as chairman.
Barrick is run as a business first, and a gold company second. “There are three value drivers at Barrick: finding or acquiring ore reserves; conversion of those reserves into gold bricks; and hedging activities,” says Carrington. “Everything we do supports or directs these three core activities.”
What distinguishes the company? According to Carrington: “We are able to make decisions very fast, which served us well, for example, in bidding for Arequipa.
“In mining development, we are good arrangers. By that I mean the combined activity of technical work (like drilling and feasibility work), permitting (which is both technical and government), financing, other kinds of government relations, doing all those things concurrently and well, and having them lead to some well-defined endpoint. That allowed us to do Pierina in 26 months from when we were first associated with the property to when we poured our first gold. In the case of Bulyanhulu it was two years, almost to the day, from when we closed the deal with Sutton to pouring our first gold–fully permitted, fully financed, and to all the standards that one would expect of a Canadian company.
“Another distinction is our focus on trying to be the best. We intend to stay in the gold business; it provides a tremendous focus for us.
“While we are very active in exploration, equally we’re as aggressive and active in acquisitions. We work hard to replenish and add to our reserve base, to allow us to have profitable production growth, that in turn leads to earnings and cash flow improvements, which is what it’s all about at the end of the day.”
Gold and the Bottom Line
“We bring a strong sense of financial discipline to the business of gold mining. We are very focused on the bottom line,” says Jamie Sokalsky, who joined Barrick in 1993 as treasurer, and has been CFO since 1999. “Our main financial principles and fundamentals are to increase cash flow, increase equity value and to maintain financial strength and flexibility.”
Barrick is prospering in spite of a relatively low gold price, about US$265/ounce. In the year 2000 the company achieved its highest-ever production (3.7 million ounces of gold), cash flow (US$705 million) and operating earnings (US$334 million). Cost-cutting measures brought its cash costs down to US$145/ounce of gold, the lowest for any major company. Due to the hedging program, it was earning almost US$200 operating profit on every ounce of gold poured.
The financial indicators are positive. Barrick is the only gold producer with an ‘A’-rated balance sheet from Moody’s, and ranked 30th last year in terms of profit margins on the Standard & Poor’s 500 index.
Its strategic investments in Bulyanhulu and Rodeo mines and other capital spending will soon be paying back. “Our goal is to make double digit returns on our money,” declares Sokalsky. Barrick’s return on equity (i.e., net income divided by shareholders’ equity) in 2000 was 8% before the non-cash provision.
Barrick is well known for its gold hedging program. Twenty-five percent of its current gold reserves are hedged at a price of US$340/ounce for the years 2001 and 2002, and US$360/ounce thereafter. “These contracts give us the assurance of having earnings and cash flow protected for a sustained period of time,” Sokalsky explains. “Barrick can sell its production at these hedged prices or the spot price, whichever is higher, and roll the contracts forward for up to 15 years.”
The depressed gold price of the last few years prompted Barrick to take a non-cash “provision” of US$1.1 billion in early February of this year. “The provision adjusted the carrying value of the assets acquired with shares when gold prices were higher,” explains Sokalsky. “The largest portion related to Pascua. This reflects the fact that in 1994, when we bought Lac Minerals, the price of gold was US$390/ounce… Another major part of the provision related to the Arequipa acquisition in 1996, when the gold price was more than US$100 higher than it is now…
“It was interesting that the market had no reaction to the provision. Our stock ended up a bit on the day it was announced, meaning that the market had already taken [the drop in asset value] into account.”
Does Barrick’s hedging success actually depress the gold price? “No, not over time,” says Sokalsky. “We are careful to manage the hedge position so as not to disrupt the gold price. In the long run you can only sell as much gold as is produced.” He adds: “Our hedging is only a small component of the world hedging. In 2000, Barrick produced less than 5% of the gold produced in the world.”
Sokalsky’s biggest challenge is to get the share price up. “We recognize that shareholders look at the gold price when they buy our shares. But our very conservative management allows us to make money in both high and low gold prices…. All the gold companies in the world are worth about US$25 billion, which is small compared with other industries. Barrick represents about one-quarter of that. Only about 10% of our shareholders are gold funds. As a company we need to appeal to generalist investors who look at the profitability of companies.”
If the shares are undervalued, is Barrick an easy takeover target? “We are undervalued, so we are attractive to investors. However, the value of the company is twice as high as the next competitor in the gold industry. So it’s hard to see how a takeover of Barrick by another gold company could happen.”
Alex Davidson joined Barrick in 1993 as vice-president of exploration, and has since added “senior” to his title. He arrived just as the company was going international. Davidson’s exploration team of 55-60 work out of six offices–Elko, Nev.; Lima, Peru; La Serena, Chile; San Juan, Argentina; the Bulyanhulu site, Tanzania; and Moscow, Russia.
“Bulyanhulu illustrates best our style of exploration–to acquire properties if they have potential to increase reserves,” says Davidson. Barrick had watched Bulyanhulu since 1994, shortly after Sutton picked up the property. A downturn in the market saw Sutton’s shares s
lide from $27.50 in 1994 to $12 in early 1999, when Barrick made a successful offer for the company. Sutton had already found 3.6 million ounces of gold reserves and almost that amount in additional resources. Through 205,000 m of drilling, Barrick had nearly tripled the reserves to 10.0 million ounces, with an additional 4.6 million ounces of gold resources by the end of 2000. “They’re still growing,” crows Davidson. “We’re still drilling.”
The high average grade and ore continuity at Bulyanhulu have been so promising that Barrick has expanded its property base in Tanzania’s Lake Victoria Gold Belt to more than 7,200 km2. This is the most stunning example of Barrick’s district development programs, going into producing areas to find more ore. In fact, 95% of the company’s exploration budget of US$27 million this year will be spent in Nevada, Chile, Peru and Tanzania, in the general area of its operating mines or advanced projects.
Canada is not on the list, according to Davidson. “We can’t be everywhere, so we go where we think the best potential is.”
Funding of university-based research and tracking new technology keeps Davidson’s team on par with the competition, but the group is also involved with an innovative technique.
In March of this year Barrick hired Quantec to begin a state-of-the-art time-domain distributed array system (DAS) survey of the Goldstrike property in Nevada, in search of anomalies, particularly zones of silicification. This system allows the exploration team to map the subsurface more than a thousand metres deep, and virtually eliminates signal interference, even from surface buildings and mine workings. Comparing the signals to borehole logs from areas already surveyed by DAS, the team will be able to extrapolate to new areas. Drilling the new anomalies should begin the middle of this year.
The usefulness of this technique is part of the reason for an alliance signed in April by Barrick, Noranda Inc. and Quantec, whereby the mining companies have taken an equity interest in the geophysical company to fund research and manufacturing of new units including DAS. Barrick and Noranda will in turn have preferred rights to use this equipment in advance of other companies.